Small Business Loans: The Six Products, Ranked by What They Actually Cost
A merchant cash advance quotes a factor rate of 1.35 and sounds cheaper than a 9% SBA loan. Converted to an APR, it is over ten times the price. Here is the whole ladder, honestly costed.
- Published
- Read
- 10 min
- 90%+
- True APR on a 1.35 factor rate
- $17,500
- Cost of a $50,000 advance in six months
- 2 yrs
- Trading history most bank lenders require
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There is one piece of arithmetic that separates business owners who finance growth from those who finance a slow decline, and it is the conversion of a factor rate into an APR. A merchant cash advance offered at a factor of 1.35 is presented as a 35% cost, because you repay it out of daily receipts over six months rather than over a year, the honest annualised cost is north of 90%, and on a shorter payback, considerably more.
That is not a fringe product. Advances and short-term online loans are the most heavily marketed business finance in the country, precisely because they are the easiest to get. The ladder below runs from cheapest to most expensive. The right move is almost always to work down it from the top and stop at the first product that will actually approve you.
The six products, priced honestly
| Product | Typical true cost (APR) | Amount | Speed | What it takes |
|---|---|---|---|---|
| SBA 504 | ~6–8% fixed | Up to $5.5M (CDC portion) | 30–90 days | Real estate or heavy equipment only; 10% down |
| SBA 7(a) | ~Prime + 2.25–4.75% | Up to $5M | 30–90 days | 2 yrs trading, 680+ score, full financials, personal guarantee |
| Bank term loan | 7–13% | $25k–$500k+ | 2–6 weeks | 2 yrs trading, profitability, DSCR above ~1.25 |
| Credit union / CDFI loan | 7–14% | $10k–$250k | 2–5 weeks | Membership or service area; CDFIs lend to thinner files |
| SBA microloan | 8–13% | Up to $50,000 | 3–6 weeks | Startups accepted; via nonprofit intermediaries, often with mentoring |
| Online term loan | 15–45% | $5k–$250k | 1–3 days | 6–12 months trading, $100k+ revenue |
| Business line of credit | 10–30% on drawn balance | $10k–$250k | 3–10 days | Revenue history; pay only on what you draw |
| Invoice factoring | 15–40% | Up to ~85% of invoices | 2–7 days | Priced on your customers' credit, not yours |
| Merchant cash advance | 60–150%+ | $5k–$250k | 24–48 hours | Card receipts. Almost anyone qualifies, which is the warning |
Ranges move with base rates, so read the ordering rather than the numbers. Notice the inverse relationship down the entire table: every step faster and easier is a step more expensive. That relationship is not a coincidence and it is not negotiable.
What the SBA loans actually are
The SBA does not lend money. It guarantees a portion of a loan made by a bank, which lets the bank approve a business it would otherwise decline and cap the rate it charges. That is the whole mechanism, and understanding it explains everything else about the process.
| SBA 7(a) | SBA 504 | |
|---|---|---|
| Use of funds | Almost anything. Working capital, acquisition, refinance, equipment, real estate | Real estate and major equipment only |
| Maximum | $5,000,000 | $5,500,000 CDC portion, larger total project |
| Rate type | Usually variable, tied to prime, capped by SBA | Fixed for the CDC portion |
| Term | 10 yrs working capital, up to 25 yrs real estate | 10, 20 or 25 years |
| Down payment | 10% typical for acquisitions | 10% typical, sometimes 15–20% |
| Structure | One lender, SBA-guaranteed | 50% bank / 40% CDC / 10% you |
| Guarantee fee | Tiered by size and term, financeable | Built into CDC pricing |
| Prepayment penalty | Only on terms over 15 years, declining | Declining over the first ten years |
| Best for | Working capital, buying a business, consolidating expensive debt | Buying your premises at a fixed rate |
The 504 is the most under-used cheap money in small business finance. If you are paying rent on premises you intend to occupy for a decade, a fixed-rate 504 with 10% down is frequently cheaper than the rent, and you own the asset. It only works for real estate and equipment, which is why it gets less attention than the general-purpose 7(a).
What lenders require, by stage of business
| Your stage | Realistically available | Not yet available |
|---|---|---|
| Pre-revenue / idea | Personal savings, friends and family, grants, SBA microloan via a nonprofit, business credit card | Bank term loans, SBA 7(a), lines of credit |
| 0–6 months trading | Microloan, CDFI, secured business credit card, equipment financing (the equipment is the collateral) | Most bank and SBA lending |
| 6–12 months, revenue growing | Online term loan, invoice factoring, some lines of credit | Bank term loans, best SBA pricing |
| 12–24 months, profitable | CDFI, credit union, some SBA lenders, better online pricing | Best bank pricing |
| 2+ years, profitable, 680+ score | The entire ladder, including SBA 7(a) and bank term loans | — |
This table exists to make one point: if you are at nineteen months of trading and considering a 90% APR advance, the cost of waiting five months is almost always less than the cost of the advance. Bridge with a line of credit, a card, or slower growth, and cross the two-year gate.
When borrowing is the wrong answer
- Financing an asset with a measurable return. Equipment that raises capacity, premises that replace rent, inventory with a known sell-through rate.
- Bridging a genuine timing gap between delivering work and being paid, where the customer is creditworthy and the invoice is real.
- Refinancing expensive debt into an SBA 7(a), which is one of the programme's explicitly permitted uses and often the single best move a struggling business can make.
- Buying an existing profitable business, where the cash flow servicing the loan is already documented.
- Taking a line of credit before you need it, while the numbers look good. Availability costs little and applications go better when you are not desperate.
- Covering losses. Debt does not fix a business that loses money on every sale; it postpones the reckoning and enlarges it.
- Funding marketing on an untested channel, where the return is a hope rather than a measurement.
- Any borrowing where you cannot state the monthly payment as a percentage of your worst recent month's revenue.
- Stacking a second advance on top of a first, which is the most reliable predictor of business failure in this market.
- Taking fast money because it is fast, when a cheaper product would approve you in three weeks.
VerdictConvert every offer to an APR, work down the ladder from the top, and refuse to sign anything whose monthly cost you have not tested against your worst month of the last two years. If the only product that will approve you is an advance, the honest reading is usually that the business is not ready to carry debt yet.
The sequence that gets the cheapest approval
Pull your personal credit and fix the obvious first
A 680 personal score is the effective gate for the cheap half of the market, and personal credit matters more than business credit for loans under about $250,000. Paying revolving balances below 30% utilisation can move a score materially within one statement cycle. Do this before applying, not after a decline.
Assemble the full document package once
Three years of business and personal returns, year-to-date P&L and balance sheet, a twelve-month projection with written assumptions, and a business debt schedule. Every lender wants the same things. Building it once turns a three-month process into a four-week one.
Start at the top of the ladder even if you expect a no
Apply to an SBA Preferred Lender and a local credit union or CDFI simultaneously. A decline costs you a credit inquiry and tells you exactly what is missing, which is information the expensive lenders will never give you.
Convert every offer to an APR before comparing
Factor rate, weekly payment, daily payment, total repayment. All of it goes into one column: annual percentage rate. If a lender will not state an APR, that refusal is the answer.
Stress-test the payment against your worst month
Find the lowest-revenue month in your last two years and check that the payment clears with room. Business finance fails on seasonality far more often than on a bad year.
Free calculator
Run the monthly payment and total interest on any term loan offer
Before signing a business loan
- Every offer converted to an APR, factor rates included
- Personal guarantee terms read. Limited or unlimited, spouse required or not
- Collateral position confirmed: identified assets or a blanket UCC-1
- Prepayment penalty terms found and understood
- Confession of judgment and stacking clauses checked for
- Payment tested against your lowest-revenue month in two years
- SBA Preferred Lender status confirmed if going the SBA route
- Full document package assembled before the first application
- Total cost of waiting to cross the two-year gate compared to the fast option
- $67,500
- Repaid on a $50,000 advance
- $30,900
- Total interest on the same sum via SBA
- 680
- Personal score that unlocks bank pricing
- 10%
- Down payment on an SBA 504
1.35 factor, six months
Over ten full years
More than business credit
For premises you would rent anyway
Every step down the finance ladder buys you speed and sells you margin. The fastest money in the market is available to everyone, which is precisely the problem with it.
Frequently asked questions
- What is the cheapest way to borrow for a small business?
- In order: an SBA 504 loan for real estate or major equipment, then an SBA 7(a) for general purposes, then a conventional bank term loan, then a credit union or CDFI loan. All four sit roughly between 6% and 14% APR. The products advertised most heavily, online term loans, merchant cash advances. Sit between 15% and 150%. Work down the list and stop at the first product that will approve you.
- How do I convert a factor rate to an APR?
- A factor rate multiplies your principal: 1.35 on $50,000 means repaying $67,500, a $17,500 cost. Two adjustments turn that into an APR. First, annualise it, $17,500 over six months is 70% simple. Second, account for the fact that daily repayments cut your balance continuously, so your average outstanding is roughly half the original, which roughly doubles the effective rate. The honest figure exceeds 90%, and shorter paybacks are worse, not better.
- Can I get a business loan with no revenue?
- Not from a bank, and not through SBA 7(a). Realistic pre-revenue options are an SBA microloan through a nonprofit intermediary (up to $50,000, and these lenders do accept startups, often with mentoring attached), a CDFI, equipment financing where the equipment is its own collateral, personal savings, or a business credit card. Everything else needs at least six to twelve months of documented revenue.
- Do I have to sign a personal guarantee?
- For almost any business loan below roughly $500,000, yes, including SBA loans, where anyone owning 20% or more of the business is generally required to guarantee. It means your personal assets stand behind the debt whatever the entity structure. What varies is whether the guarantee is limited to a share of the balance or unlimited, and whether a spouse must sign. Both are worth negotiating and both are in the document.
- Why did my bank decline me when an online lender approved me instantly?
- They are underwriting different things. A bank tests whether your cash flow covers the debt with a margin, usually a debt service coverage ratio above about 1.25, and wants two years of profitable trading. An advance funder tests whether card receipts arrive daily, which almost any trading business passes. The instant approval is not a better assessment of your business, it is a lender pricing for a much higher failure rate, which is why the cost is what it is.
- What is a blanket UCC-1 lien and why does it matter?
- It is a filing that places a security interest over all of your business assets rather than specific identified collateral. Fast lenders file them routinely even for small amounts. The consequence appears later: when you approach a bank for a larger, cheaper loan, there is no unencumbered collateral left to pledge, so the answer is no. Before signing, ask explicitly whether the lien covers identified collateral or everything, and treat a blanket lien on a small loan as a real cost.
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